Antitrust Law Daily Wrap Up, ANTITRUST NEWS: FTC modifies order restricting Toys “R” Us communications with suppliers regarding discounters, (Apr 15, 2014)

By Jeffrey May, J.D.

Because Toys “R” Us, Inc. “no longer has market power as a buyer of toys,” the FTC has lifted restrictions on the retailer’s ability to enter into certain conditional supply relationships. The Commission on April 11 granted the firm’s January petition to modify a 1998 Final Order containing the restrictions (In the Matter of Toys “R” Us, Inc., FTC Dkt. 9278, File No. 941 0040).

In its April 11 Order, the Commission eliminated three provisions that prohibited Toys “R” Us from:

(1) agreeing with a supplier to limit supply or to refuse to sell toys and related products to a toy discounter;

(2) pressuring or coercing a supplier to limit supply or to refuse to sell toys and related products to a toy discounter; and

(3) requesting or encouraging a supplier to provide the retailer with information on sales or actual or intended shipments to a toy discounter.

The Commission also modified a record-keeping provision with respect to communications with suppliers. The requirements were eased because, in light of the modifications, it was no longer necessary that Toys “R” Us maintain all its communications with its suppliers relating to any aspect of actual or potential purchase or distribution of toys and related products.

The record-keeping provision was not removed completely, however, because the order continues to prohibit Toys “R” Us from facilitating agreements between or among suppliers to limit the sale of toys and related products to a retailer. Toys “R” Us informed the FTC that the Commission’s information needs would be satisfied by receiving communications of the officers of its merchandizing organization. Thus, going forward, Toys “R” Us is required to maintain and make available to the FTC staff “records of communications with suppliers of respondent by the officers of respondent within its merchandizing organization.” The Order expires in 2018.

Changed circumstances. Toys “R” Us convinced the agency that changed conditions of fact warranted reopening and modifying the Order, which was issued after the Commission determined that the retailer entered into a series of agreements with toy makers to prevent the manufacturers from selling to club stores the same products they sold to Toys “R” Us. The Commission’s determination was later affirmed by the Seventh Circuit in Toys ‘R’ Us, Inc. v. FTC, 221 F.3d 928; 2000-2 Trade Cases ¶72,978 (7th Cir. 2000), which held that the company used its significant market power to orchestrate a “hub and spoke” conspiracy among its suppliers to restrict the supply of toys to certain warehouse clubs.

The terminated provisions addressed unreasonable vertical agreements between suppliers and a retailer with market power as a buyer and distributor of toys. Toys “R” Us demonstrated to the Commission’s satisfaction that it no longer had market power as a buyer of toys in light of the growth of Walmart, Target, and online sellers.

Toys “R” Us showed that it is no longer the largest customer of the major toy companies and that toy companies can and do distribute toys successfully without using it, the Commission concluded. For instance, Walmart and Target have replaced Toys “R” Us as the most important customer for the two largest toy manufacturers. Moreover, between 2002 and 2012, online sales, as a proportion of total toy sales, almost tripled.

Because the Commission determined that Toys “R” Us demonstrated changed conditions of fact to support the modification, it did not consider the company’s alternative argument that the public interest justified the modifications to the Order. In its petition, Toys “R” Us contended that eliminating the provisions would allow it to engage in procompetitive (or neutral) vertical conduct that could allow it to compete more effectively.

Civil penalty for alleged order violation. In 2011, Toys “R” Us agreed to pay a $1.3 million civil penalty to settle FTC charges that it violated the 1998 order. The FTC alleged that, through its Babies “R” Us subsidiary, the company complained to several of its suppliers about the discounts other retailers were providing to consumers for baby products, requested information from several of the companies about how they were supplying products to discounters, and failed to keep records of communications with its suppliers.

Attorneys: D. Bruce Hoffman (Hunton & Williams LLP) for Toys “R” Us, Inc.

Companies: Toys “R” Us, Inc., Walmart, Target

News: Antitrust FederalTradeCommissionNews